Summary Judgment Brief in Civil Penalties Case
March 01, 2001
The following brief was submitted to the trial court in North Carolina School Boards Association, et al., v. Moore, et al., a lawsuit brought on behalf of school boards to recover administrative fines collected by various state agencies. The brief is provided here because it summarizes more than other documents in the case all the issues in dispute. The case currently is on appeal to the North Carolina Supreme Court; oral argument was heard in the spring of 2004 and we now are awaiting the court's decision.
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
98 CVS 14158
NORTH CAROLINA SCHOOL BOARDS
ASSOCIATION, et al.
HARLAN E. BOYLES, et al.
BRIEF IN SUPPORT OF
FOR SUMMARY JUDGMENT
TABLE OF CONTENTS
HISTORY OF THE CONSTITUTION
MEANING OF ARTICLE IX, SECTION 7
DEPARTMENT OF TRANSPORTATION WEIGHT PENALTIES
OTHER DEPARTMENT OF TRANSPORTATION PENALTIES
EMPLOYMENT SECURITY COMMISSION PENALTIES
UNIVERSITY PARKING FINES
OTHER PARKING FINES
THE DEDICATED CENTRAL FUND
FINES PAID BY SCHOOLS
This is a declaratory judgment action brought by the North Carolina School Boards Association and the Wake, Durham, Johnston, Buncombe, Edgecombe and Lenoir county school boards. The purpose is to determine whether various moneys collected by state agencies are "penalties and forfeitures" or "fines collected . . . for . . . breach of the penal laws of the State" and thus should go to the public schools under Article IX, Section 7, of the North Carolina Constitution. The Supreme Court decided in 1996 in Craven County Board of Education v. Boyles, 343 NC 87 (1996), that civil penalties (administrative fines) collected by state agencies are subject to Article IX, Section 7. In dispute was a $926,000 civil penalty paid by Weyerhaeuser Company to the Department of Environment, Health and Natural Resources for violations of air pollution control standards at a pulp mill in Craven County. Adhering to earlier decisions that the constitutional provision applies not only to criminal fines but also to "the clear proceeds of all penalties and forfeitures in all cases, regardless of their nature, so long as they accrue to the state," the court had "no difficulty in concluding that the clear proceeds from the settlement paid by DEHNR were covered by Article IX, Section 7 of the North Carolina Constitution" and should be paid to the Craven County Board of Education. Craven County, at 91.
Since the Craven County decision, over $7 million a year has been directed to the public schools from civil penalties collected by various agencies such as the Alcoholic Beverage Control Commission and the Department of Environment and Natural Resources. (Defendants' Response to Plaintiffs' Interrogatory # 1, attached as Exhibit A) The moneys collected by a number of agencies remain in dispute, however. Among those are moneys collected by the Department of Transportation for overweight vehicles; amounts collected by the Department of Revenue for late or non-payment of taxes; late fees collected by various occupational licensing boards; parking fines collected by the university system; and the "tax" on illegal drugs. The plaintiff school boards seek a declaratory judgment from this court that those moneys should go to the public schools, and the payment of funds already collected.
Also at issue is the extent of the General Assembly's control over civil penalties that go to the schools. Following the Craven County decision, the legislature required that administrative fines be paid to a state Civil Penalty and Forfeiture Fund and that the moneys in that fund then be transferred to the State School Technology Fund and allocated to individual school units based on their enrollment. Because the Constitution says that fines "shall belong to and remain in the several counties," the plaintiffs ask the court to declare that under the Constitution civil penalties should go to the school systems where collected and that the county boards of education governing those school units should decide how to spend the money.
Another issue the court must decide is whether the Department of Environment can divert assessed civil penalties to third parties by means of "supplemental environmental projects." That is, instead of paying the full fine, the violator helps pay for an environmental project unrelated to the violation. The effect is that the Department of Environment rather than the school board decides how the penalty paid by the violator is to be spent. (This issue is addressed in a separate brief.)
The final issue is whether administrative fines paid by school systems themselves must be returned to the schools under Article IX, Section 7. Although the agency may have any number of policy reasons for not wanting to have to pay the penalty back to the school board, that is clearly what is required by the Constitution.
County school fund. All moneys, stocks, bonds, and other property belonging to a county school fund, and the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.
The section came into the Constitution in 1875 and was the end result of years of struggle to find a dependable source of revenue for the fledgling public school system. See David M. Lawrence, "Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis," 65 N.C.L.Rev. 49 (1986) (hereafter referred to as "Lawrence").
In the early nineteenth century there was widespread opposition to the use of tax dollars for public education. The solution was the creation of permanent endowments from other revenue sources, and in 1825 North Carolina became the twelfth state to establish such an endowment fund, the Literary Fund. The fund consisted of dividends from bank stock owned by the state and was to be used "for the support of common and convenient Schools for the instruction of youth . . . ," but it was inadequate because of money lent to the state treasury. In the late 1830s, though, the federal government distributed surplus revenues to the states, and the legislature added stock to the fund, allowing the creation of state-supported public schools with the state per capita funding matched by the county. Lawrence, at 52-54.
Following the Civil War, the state's assets were worthless because they had been invested in state or Confederate bonds or in banks that had bought Confederate bonds. The Reconstruction era Constitution of 1868 attempted to solve the problem by creation of an "irreducible educational fund" consisting of the Literary Fund and the "net proceeds that may accrue to the State . . . from fines, penalties and forfeitures. . . ." After seven years, however, it was clear that the fund was not irreducible, that the State continued to divert the moneys to other purposes, and little state money made it to the public schools. Thus, at least one of the purposes of the 1875 revision of the Constitution was to assure local, rather than State, control over the fines, penalties and forfeitures that were intended to support public education. Lawrence, at 57-60.
MEANING OF ARTICLE IX, SECTION 7
North Carolina was not alone in using its constitution to dedicate fines, penalties and forfeitures to the public schools. Similar provisions currently are part of the constitutions of a dozen other states - Indiana, Michigan, Missouri, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Virginia, West Virginia, Wisconsin and Wyoming - with Missouri the most likely model for our Article IX, Section 7. Lawrence, at 51, n. 20, and 56-57. The meaning of the constitutional language probably has been construed more often by the courts in North Carolina than in any of those other states. From the decisions of our appellate courts we already know:
1. The constitutional provision encompasses two categories of moneys. "These are (1) the clear proceeds of all penalties and forfeitures in all cases, regardless of their nature, so long as they accrue to the state; and (2) the clear proceeds of all fines collected for any breach of the criminal laws." Mussallam v. Mussallam, 321 N.C. 504, 509 (1988). Except for the "tax"on illegal drugs - which has been determined by the Fourth Circuit Court of Appeals to be criminal punishment - this case does not concern criminal fines. Rather, it is about penalties for violations of civil or administrative statutes and rules. What the case law already establishes is, as stated by the Supreme Court in Mussallam, that any penalties that accrue to the state, "regardless of their nature," are intended for the public schools.
2. The label put on the money does not matter. In Cauble v. City of Asheville, 301 N.C. 340, 344 (1980) ("Cauble II"), the court rejected any distinction based on whether the amount collected for a parking violation was called a "fine" or a "penalty": "Indeed, we have often stated that the label attached to the money does not control." In Mussallam, supra, an appearance bond was considered penal even though it was called a civil bond. "In Mussallam, the appearance bond was penal in nature, even though it was designated as a civil bond. We held that it is the nature rather than the form of the instrument that governs, however it may be labeled." State ex rel. Thornburg v. Currency, 324 N.C. 276, 283 (1989). And, again, in the Craven County decision, the court said, "As we said in Cauble, it is neither 'the label attached to the money' nor 'the [collection] method employed,' but 'the nature of the offense committed' that determines whether the payment constitutes a penalty." Craven County, at 92.
3. The key to whether a penalty or forfeiture belongs to the schools is whether the proceeds are required to be paid to the State; if they are, the money goes to the public schools. In State ex rel. Thornburg v. House and Lot, 334 N.C. 290 (1993), the Supreme Court rejected the contention that the proceeds of a civil Racketeer Influenced and Corrupt Organizations Act (RICO Act) forfeiture were "restitution" to the State and law enforcement agencies and thus did not have to be paid to the public schools. The court said it had drawn a clear line in Mussallam: "We concluded that whenever the proceeds resulting from a forfeiture were required to be paid to the State, Article IX, Section 7, required that they be paid to the public school fund." At 294. Likewise, in Craven County the court brushed aside any argument that the $926,000 civil penalty collected from Weyerhaeuser was remedial rather than a penalty, based on the fact that the monies accrued to the State.
DEPARTMENT OF TRANSPORTATION WEIGHT PENALTIES
One large source of revenue in dispute is the more than $7 million collected each year by the Department of Transportation (DOT) under G.S. 20-118 for violations of the restrictions on the weight of vehicles. The statute specifies limits on the gross weight of a vehicle, the weight transmitted by a single axle, and the weight transmitted by combinations of axles. See N.C. Gen. Stat. § 20-118(a) and (b). Violations are detected at permanent highway weigh stations and also on portable scales moved from place to place over time. The penalties for these violations are listed in subsection (e) of G.S. 20-118 - e.g., for a single-axle or tandem-axle violation, four cents per pound for the first 1,000 pounds, six cents per pound for the second 1,000 pounds, and ten cents per pound above that amount. In fiscal year 1997-98 the department collected $7.9 million for overweight violations; in 1998-99 it was also $7.9 million; and in 1999-2000 the total was $6.6 million. (Defendants' Response to Plaintiffs' Interrogatory # 10, attached as Exhibit B) The totals include some several hundred thousand dollars for failure to have a fuel tax decal, failure to have a license, late fees and interest, but the great bulk of the money is for weight violations.
The statute itself refers to these dollar amounts as penalties. The heading of subsection (e) of G.S. 20-118 is "Penalties," and the several subdivisions refer to the failure to comply with the statute as a "violation" and then either say "the Department of Transportation shall assess a civil penalty" for the violation or declare that "The penalty for a violation . . . ." No other term is used in the statute to describe the nature of the payment. In addition, G.S. 20-115 declares that it is "unlawful" to drive a vehicle exceeding the weight limits in G.S. 20-118.
Considering the terminology of the statutes and the nature of the act for which the penalty is assessed, it would seem obvious that these collections are penalties within the meaning of Craven County and Article IX, Section 7. The department's resistance to that view seems to be based on a single court decision from 1976 in which previous versions of these statutes were construed in a different context.
The case relied upon by DOT is Cedar Creek Enters., Inc. v. State Dep't of Motor Vehicles, 290 N.C. 450 (1976). There, a truck was stopped in Cumberland County and assessed a $2,080 penalty for over-licensed weight. The owner refused to pay and sued in superior court to enjoin the Division of Motor Vehicles (DMV) from collecting. DMV responded that G.S. 20-91.1 prohibited suits "brought for the purpose of preventing the collection of any tax imposed in this Article [the article containing G.S. 20-118] . . . ." Thus, the court had to decide whether the penalty assessed for an overweight vehicle was a "tax" within the meaning of G.S. 20-91.1.
The court in Cedar Creek was able to conclude that the penalty prescribed by G.S. 20-118 was a tax for purposes of the limitation on bringing suits because the statutes, as written at that time, used both terms. In particular, G.S. 20-96, as it was written when the case was decided, provided that the intent of the statute was to require each vehicle to obtain a license to cover the maximum load to be carried; that operation of the vehicle without doing so would require the owner to "pay the penalties prescribed in G.S. 20-118"; and that nonresidents would be subject to "the additional tax provided in this section when their vehicles are operated in excess of the licensed weight . . . ." Cedar Creek, at 452. The same statute, G.S. 20-96, went on to say that a violator would be guilty of a misdemeanor "in addition to being liable for the additional tax prescribed herein." Id. Because the only monetary charge for operating a vehicle over the licensed weight was the "penalty" in G.S. 20-118, the court reasoned that the reference to "additional tax" had to mean that penalty. Consequently, the court concluded, the plaintiff was attempting to sue to prevent the collection of a tax, which was barred by G.S. 20-91.1.
The Cedar Creek decision does not support the position of the DOT in the issue before the court now. First, the statutory language is different. The current G.S. 20-96 does not speak to the penalties for operating a vehicle over weight, and it no longer has the language about an "additional tax." The statute now is about the authority of officers to detain vehicles pending payment of unpaid penalties, assessments and taxes. Today, it is only G.S. 20-118 that addresses the nature of the charges for being over the weight limit, and that statute uses only the words "penalty" and "civil penalty," it does not say "tax." It is noteworthy that both G.S. 20-96 and -118 were amended by the General Assembly in 1999, well after the Craven County decision. Legislators should be presumed to be aware of the Craven County holding that civil penalties go to the public schools and to have known the implications of calling the collections under G.S. 20-118 civil penalties.
Cedar Creek also is not controlling because it did not purport to address, even indirectly, the issue of whether the amounts collected under G.S. 20-118 are penalties within the meaning of Article IX, Section 7. All the court decided in Cedar Creek was that the legislature, in apparently using the terms "penalty" and "additional tax" interchangeably in the vehicle weight statutes at that time, meant to prohibit lawsuits to prevent the collection of those penalties. The court did not have to concern itself with whether the collection was really a tax; it was only interested in whether the word "tax" as used in those statutes, whatever it might mean, embraced the "penalty" in G.S. 20-96 and thus triggered the application of G.S. 20-91.1.
Significantly, in a different context the penalty assessed under G.S. 20-118 for an over weight vehicle has been considered a penalty. In Young's Sheet Metal and Roofing, Inc., v. Wilkins, Comr. of Motor Vehicles, 77 N.C. App. 180 (1985), the assessment of a weight violation fine by DMV under G.S. 20-118 was challenged because the statute, as written at that time, gave DMV complete discretion as to the amount to be assessed. The Court of Appeals held that such discretion amounted to an unconstitutional delegation of judicial power. Finding that "the application of the law so as to make the penalty commensurate with the conduct . . . is an exercise of judicial power," the court decided that assessment of the penalty by DMV rather than by a court was unconstitutional. Id., at 183-84. In so holding, the court had no doubt that the assessment was in fact a penalty, and it did not even consider the possibility that it was a "tax." Imposing a tax would not implicate the judicial power and there would have been no constitutional problem if the collection were a tax rather than a penalty.
Because G.S. 20-118 explicitly refers to the assessment for vehicle weight violations as a civil penalty and does not use the term tax; and because Cedar Creek was based on different statutory language and did not address the meaning of penalty under Article IX, Section 7; and because Young's Sheet Metal and Roofing found such an assessment to be a penalty within the constitutional meaning - the court should declare that the amounts collected by DOT under G.S. 20-118 are penalties and must go to the public schools.
OTHER DEPARTMENT OF TRANSPORTATION PENALTIES
Two other penalties collected by the Department of Transportation are put in issue by the complaint. Pursuant to G.S. 20-79(e), the department collects a civil penalty of $200 for driving a motor vehicle which improperly displays a dealer's tag. The statute explicitly refers to the penalty as a "civil penalty" in two separate places and uses no other term. The complaint alleges that $21,300 was collected in such penalties in the last year for which information is available, and the department acknowledges that more than $10,000 was collected in fiscal 1995-96. Complaint, ¶ 39; Amended Answer (of defendants Boyles, Broad, etc.), ¶ 39. Because the amount owed under G.S. 20-79(e) has been defined as a civil penalty by the General Assembly, and because on its face the payment is a penalty that accrues to the state, it is not clear why the department believes the proceeds should not go to the public schools. Unlike the fines for vehicles over weight limits, the statute explicitly negates any contention that the money could be considered a tax, because G.S. 20-79(e) says the proceeds are to be credited to the Highway Fund "as nontax revenue." Apparently the department resists paying these moneys to the public schools on the grounds that the statute provides that they go to the Highway Fund, but there seems little question that the money is a penalty subject to Article IX, Section 7, making the statutory directive inoperative.
Likewise, G.S. 20-309(e) imposes a "civil penalty" - that is the term used in the statute - of $50 for any lapse in insurance coverage for one's motor vehicle, and a $200 civil penalty against the insurance company for failing to give notice to DMV of the termination of coverage. Again, both the statutory terminology and the nature of the penalty establish on their own that this is a penalty that accrues to the state and thus should be subject to Article IX, Section. 7. The plaintiff school boards are not aware of the basis for the department's resistance to paying these funds according to the Constitution.
Since 1989 North Carolina has had a "tax" on illegal drugs, originally called the "Controlled Substances Tax" and now identified as the "Unauthorized Substances Tax." See N.C. Gen. Stat. § 105-113.105 et seq. It is a tax on the "dealer" in illegal drugs, defined as someone who "actually or constructively possesses more than 42.5 grams of marijuana, seven or more grams of any other controlled substance that is sold by weight, or 10 or more dosage units of any other controlled substance that is not sold by weight." N.C. Gen. Stat. § 105-113.106(3)a. (The law was amended in 1997 to include unlawfully possessed alcohol as well.) The current tax rate is 40 cents per gram of harvested marijuana, $3.50 per gram of other marijuana, $50 per gram of cocaine, and $200 per gram of other drugs sold by weight. N.C. Gen. Stat. § 105-113.107(a). The $200 rate was twice as high until the legislature reduced it in 1998. Of course, anyone who possesses the drugs on which the tax is assessed is guilty of a crime under the Controlled Substances Act.
Not surprisingly, people do not pay the drug tax voluntarily and the collections come after a person has been arrested. Unlike other taxes, the revenue does not go for general support of government; rather, 75 percent of the revenue from the drug tax goes to the law enforcement agency that conducted the investigation leading to the "tax" assessment. N.C. Gen. Stat. § 105-113.113(b). Only the remainder goes to the state general fund. Through fiscal year 1999-2000 the gross collections from the drug tax - the tax plus penalties and interest - totaled nearly $48 million. (Defendants' Response to Plaintiffs' Interrogatory # 7, attached as Exhibit C) There should be no real question that this "tax" is a penalty within the meaning of Article IX, Section 7, and that all this money rightly belongs to the public schools.
There has been extensive litigation in both state and federal court over whether the drug tax is criminal punishment for purposes of double jeopardy, with the state appellate courts saying it is not and the federal Fourth Circuit Court of Appeals saying it is. For the drug tax revenues to go to the schools under Article IX, Section 7, the tax does not have to amount to criminal punishment; as decided in Craven County, the constitutional provision covers all penalties and forfeitures, regardless of their nature. Thus, the holdings in the double jeopardy cases - on whether the drug tax is a criminal punishment - do not bind this court on whether the revenue from the tax goes to the public schools, but the analysis of the Fourth Circuit is instructive.
In Lynn v. West, 134 F.3d 582 (4th Cir. 1998), the court analyzed the drug tax under the framework established by the Supreme Court in Department of Revenue v. Kurth Ranch, 511 U.S. 767 (1994), the definitive case on when a state drug tax amounts to a criminal penalty. The Fourth Circuit noted that there were four key factors to be considered under Kurth Ranch: (1) the high tax rate, (2) the deterrent purpose of the tax, (3) the tax being conditioned on commission of a crime, and (4) the tax being levied on the possession of goods that were never lawfully possessed. Lynn, at 589. Not all of the factors need to be present for a tax to be considered a criminal penalty, but the overriding question is "whether the tax is so punitive that the constitutional protections afforded to criminal defendants should attach to its enforcement." Id. The court concluded that "North Carolina's Drug Tax . . . has enough punitive features that its nature is that of a criminal penalty, not a civil tax." Id. Drugs were taxed at a rate higher than their market value; no other product was taxed at a similar rate; the high rate clearly was intended to deter illegal possession; and its applicability depended on commission of a crime. Id., at 589-91.
The Lynn and Kurth Ranch holdings are consistent with earlier Supreme Court decisions distinguishing taxes from criminal penalties. In Lipke v. Lederer, 259 U.S. 557 (1922), for example, the court had considered a tax on the retail sale of liquor imposed during Prohibition. Concluding that the tax actually was a criminal penalty requiring the appropriate due process, the court said:
The mere use of the word 'tax' in an act primarily designed to define and suppress crime is not enough to show that within the true intendment of the term a tax was laid. [citation omitted] When by its very nature the imposition is a penalty, it must be so regarded. [citation omitted] Evidence of crime (§ 29) is essential to assessment under § 35. It lacks all the ordinary characteristics of tax, whose primary function 'is to provide for the support of the government' and clearly involves the idea of punishment for infraction of the law - the definite function of a penalty. [citation omitted]
Lipke v. Lederer, at 561-62.
Before the Lynn decision, the North Carolina Court of Appeals several times had concluded that the drug tax was not a criminal penalty for double jeopardy purposes. See State v. Ballenger, 123 N.C. App. 179 (1996), aff'd per curiam, 345 N.C. 626, cert. denied, 522 U.S. 817, (1997); State v. Creason, 123 N.C. App. 495, aff'd per curiam, 346 N.C. 165 (1997). Since Lynn, the Court of Appeals has held that decisions of the federal circuit court are not binding on it and that, instead, it is bound by its previous panels' decisions. State v. Adams, 132 N.C. App. 819 (1999). The court invited the State Supreme Court and the General Assembly to reexamine the earlier state holdings in light of Lynn.
Each of these cases was decided in the context of double jeopardy, with the court trying to determine whether the defendant was entitled to the due process protections of a criminal case and whether a person could be prosecuted both for the underlying drug offense and failing to pay the tax. This court does not have to address those issues to decide that the revenue from the drug tax should go to the public schools under Article IX, Section 7. The constitutional provision is not limited to fines for violation of the criminal law. Rather, as the Supreme Court has said:
We interpret the provisions of Section 7 relating to the clear proceeds from penalties, forfeitures and fines as identifying two distinct funds for the public schools. These are (1) the clear proceeds of all penalties and forfeitures in all cases, regardless of their nature, so long as they accrue to the state; and (2) the clear proceeds of all fines collected for any breach of the criminal laws.
Mussallam v. Mussallam, supra, at 508-509. In further explaining the first category, the court accepted Lawrence's historical research that the term "penal law" in the Constitution went beyond our current definition of a crime:
The term 'penal laws' as used in the context of article IX, section 7, means laws that impose a monetary payment for their violation. The payment is punitive rather than remedial in nature and is intended to penalize the wrongdoer rather than compensate a particular party. See D. Lawrence, Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis, 65 N.C. L. Rev. 49, 82 (1986). Thus, in the first category, the monetary payments are penal in nature and accrue to the state regardless of whether the legislation labels the payment a penalty, forfeiture or fine or whether proceeding is civil or criminal.
Id.. at 509.
Subsequently, in State ex rel. Thornburg v. House and Lot, 334 N.C. 290 (1993), the court rejected the notion that a charge could be "restitution" to the state rather than a penalty. There the issue was a RICO forfeiture of a drug house, the proceeds of which the State wanted to go half to the State Bureau of Investigation and half to the general fund. Instead, the entire proceeds were directed to the public schools.
The high rate of the drug tax; the fact that it is imposed for unlawful activity; the fact that assessment occurs only when someone is arrested; that fact that the proceeds are directed not to general support of government but to reward the law enforcement agency finding the drug dealer - all these facts establish that within the meaning of Article IX, Section 7, the drug tax is a penalty or is sufficiently penal in nature that its proceeds belong to the schools.
Numerous sections of the state tax code impose penalties for failure to file returns, late payments, underpayments, and various other forms of noncompliance. The penalties for those violations generally are set out in G.S. 105-236, which is simply entitled "Penalties." Included in that section are penalties for failing to file a return (five percent for each month late, up to 25 percent of the tax), late payment (ten percent of the tax), negligent failure to comply with the tax laws (ten percent of the deficiency), and deficiency or delinquency in payment with the intent to evade the tax (50 percent of the deficiency). N.C. Gen. Stat. § 105-236(3), (4), (5) and (6). The Department of Revenue does not track collections of penalties for specific violations, but it reports that in fiscal year 1998-99 the total penalties collected were nearly $55 million, including almost $23 million for violations related to the personal income tax, just under $15 million for sales and use tax violations, almost $9 million for violations with respect to withholding, and nearly $8 million for corporate income and franchise tax penalties. The previous two fiscal years the total penalties collected were $47 million and $46 million. (Defendants' Responses to Plaintiffs' Interrogatory # 17, attached as Exhibit D)
The tax statutes, especially those concerning assessments for overdue amounts, distinguish between taxes, penalties and interest. The principal statute regarding the procedures for collection of amounts due the department is G.S. 105-241.l and it says:
If the Secretary discovers that any tax is due from a taxpayer, the Secretary must notify the taxpayer in writing of the kind and amount of tax due and of the Secretary's intent to assess the taxpayer for the tax. The notice must describe the basis for the proposed assessment and identify the amounts of any tax, interest, additions to tax, and penalties included in the proposed assessment.
N.C. Gen. Stat. § 105-241.1(a) (emphasis added). Independent of G.S. 105-236's provisions for penalties, G.S. 105-241.1 goes on to say, in subsection (i), when and how interest is to be computed: "All assessments of tax, exclusive of penalties assessed on the tax, shall bear interest at the rate established pursuant to this subsection from the time the tax was due until paid." The exclusion of penalties from the computation of interest emphasizes the very real distinction between tax, interest and penalties.
Despite this careful statutory scheme recognizing the difference between taxes, interest and penalties, the department apparently takes the view that the penalties it collects are really taxes and thus go to the general fund rather than to the schools. The department is correct that the statutory method of collecting penalties and interest is the same as collecting taxes themselves - G.S. 105-236 provides that penalties "are assessed as an additional tax" - but that is merely the procedural mechanism for collection of penalties and does not determine whether the penalties are taxes for purposes of Article IX, Section 7.
The only North Carolina decision that appears to have addressed this issue agrees with the conclusion that assessment and collection in the same manner as a tax does not make a penalty a tax. In Holt v. Lynch, 307 N.C. 234 (1982), the executor of an estate underpaid federal and state inheritance taxes, resulting in an assessment of interest under federal and state tax statutes. The executor then sought a refund for overpayment of inheritance tax. The executor asserted that the interest should be considered part of the cost of administration of the estate, which is a deductible expense. The Department of Revenue resisted, saying that the interest was part of the estate tax and that the law did not allow the tax to be included in the cost of administration. The Supreme Court rejected the department's position, holding that the statutory provisions allowing interest to be assessed and collected the same as the tax did not make it a tax:
To adopt the Commissioner's reasoning, we must accept his underlying assumption that interest on a tax is a tax for purposes of determining its non-deductibility under G.S. § 105-9. It is this underlying assumption that we now reject.
. . .
G.S. § 105-241.1(i1) falls under Subchapter I, Article 9, Schedule J, which is entitled "General Administration; Penalties and Remedies," suggesting that this statutory definition of tax which includes interest is for administrative purposes only, and that interest itself is substantively something different and apart from the tax. Moreover, a close reading of G.S. § 105-241.1(i1), in the context of our overall tax scheme, including the provisions of Subchapter V and VIII yields the inevitable conclusion that it is only for purposes of assessment, collection and payment that interest should be treated in the same manner as taxes. Thus, although collected as part of the tax, interest paid on an estate or inheritance tax deficiency is not part of the tax, but something in addition to the tax. See Penrose v. United States, 18 F. Supp. 413 (E.D. Penn. 1937); Estate of Bahr v. Commissioner, 68 T.C. 74 (1977).
Holt v. Lynch, at 239 (emphasis added). The same conclusion has to follow for penalties. The fact that penalties are assessed and collected in the same manner as the tax does not make the penalty a tax. It is, rather, what the statute says it is, a "penalty."
The department's assertion that penalties are part of the tax is further undermined by the manner in which those penalties are treated each April 15th. North Carolina generally uses the federal Internal Revenue Code as its base line for determining individual income tax. See N.C. Gen. Stat. §§ 105-134.1 through -134.7. Although the state does not allow deductions from taxable income for state and local taxes paid, Section 164 of the federal Internal Revenue Code does. Federal law on the meaning of Section 164 is clear that "tax" means only the tax itself, that penalties are not considered part of the tax.
The federal income tax regulations state explicitly: "a penalty, fine, interest or similar obligation is not a tax, nor is a customs duty a tax." Income Tax Regs. § 1.901-2(a)(2)(i). In upholding this position, the federal Tax Court has rejected the argument that the penalty becomes part of the tax just because it is collected in the same manner:
Next we consider the deductibility of the late filing penalty. Petitioner argues, based on the Internal Revenue Code and, supposedly California law, that because late filing penalties are assessed and collected in the same manner as taxes, that they are taxes. . . . [W]e do not agree that the manner of assessment and collection is relevant to whether something is or is not a tax.
R.B. Keenan, 57 T.C.M. 762, 773 (1989). Moreover, federal courts have recognized that while a penalty may help serve the purpose of protecting revenue sources, and can be considered remedial in part, that does not make the penalty a tax:
They [tax penalties] were held [in Helvering v. Mitchell, 303 U.S. 391 (1938)] to be of a remedial character, and considered to be primarily a safeguard for protection of the revenue. a purpose of their imposition was the reimbursing of the government for the heavy expense of investigation and the loss resulting from taxpayer's fraud. The term 'remedial' was used in the sense of providing indemnity for loss, the taxpayer's liability being measured by double the loss.
. . .
Assuming arguendo that the exaction of the Wisconsin statute is a civil sanction rather than a penalty, it does not follow that a payment, characterized as a sanction (or as compensation for loss resulting from taxpayer's own acts) is within the proper concept of what constitutes a tax as formulated by Wisconsin decisions.
. . .
'Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs.'
. . .
An assessment at twice the normal rate of tax may be considered a proportional assessment to the extent that is related to the computation of the normal tax and applies equally to those persons either failing to make an income tax report or making an incorrect return with intent to defeat or evade the income tax assessment required by law. Since it is greatly disproportionate to the normal rate imposed, its primary purpose would appear to be in the nature of a sanction and a deterrent, as well as compensation to the State for additional expenses incurred in the imposition and collection thereof, rather than a tax as defined above. It should be noted that the elements of coercion and restitution inherent in 'civil sanctions' are no more an intended and proper purpose for a tax than are the 'punitive' elements of a criminal penalty.
Miller Scrap Iron & Steel Co. v. United States, 169 F. Supp. 432, 434 (E.D. Wisc. 1958).
While North Carolina's tax code does not have to declare whether a penalty is part of a tax for purposes of income tax deductions, the issue does arise in a different context. The state allows farmers a credit against the individual income tax for property taxes paid on farm machinery. In defining what is meant by "property taxes" for purposes of that credit, the legislature has been careful to say that it does not include penalties:
(2) Property taxes. The principal amount of taxes levied and assessed by a tax unit under Subchapter II of this Chapter. The term does not include costs, penalties, interest, or other charges that may be added to the principal amount.
N.C. Gen. Stat. § 105-151.21(b)(2).
The department might be expected to argue that the penalties assessed for tax violations serve an important function of inducing compliance with the tax laws and preserving the state's revenue sources. In support, the department is likely to cite extensive case law on the distinction between these sanction and criminal penalties. See, e.g., Helvering v. Mitchell, 302 U.S. 391 (1938) ("They [civil penalties] are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud."). It must be remember, though, that the issue being addressed in those cases is whether tax penalties constitute criminal punishment for purposes of double jeopardy. In making those pronouncements, the courts are distinguishing the civil tax penalties from criminal sanctions and deciding that the criminal prosecution does not prevent collection of the civil penalty. As a result of the Craven County decision, though, the difference between civil and criminal sanctions does not matter for purposes of Article IX, Section 7. The issue before the court is not whether tax penalties are criminal fines under Article IX, Section 7, but whether they are civil penalties that accrue to the State. They are, and under Craven County the clear proceeds of those civil penalties should go to the public schools.
EMPLOYMENT SECURITY COMMISSION PENALTIES
Chapter 96 of the General Statutes establishes the state's method for providing unemployment insurance. Employers are required to pay a percentage of their employees' wages to the Employment Security Commission for deposit in the Unemployment Insurance Fund. N.C. Gen. Stat. §§ 96-6 and -9. Benefits are paid from the fund to unemployed workers. N.C. Gen. Stat. § 96-12.
When employers' contributions to the Unemployment Insurance Fund are past due, the Employment Security Commission is entitled to collect the amount due, plus interest at the rate set by G.S. 105-241.1(i) (the statute setting interest for late tax payments), plus "[a]n additional penalty in the amount of ten percent (10%) of the taxes due. . . ." N.C. Gen. Stat. § 96-10(a). There also are amounts assessed for employers' failure to file wage reports on time (G.S. 96-9(a)(7));failure to file reports (G.S. 96-10(g)); and tendering a worthless check (G.S. 96-10(h)); all of which are characterized by the statute as penalties. The commission does not maintain records of the collections for individual penalties, but reports that its total collections for all penalties in fiscal year 1999-2000 were $1,865,870. In the two previous year the collections were $1.8 million and $1.6 million. The moneys were used by the commission for establishing a computer network in its local offices, building improvements and purchases of furniture. A quarter million dollars also was used to settle a lawsuit with a commission employee. (Defendants' Response to Plaintiffs' Interrogatory # 16, attached as Exhibit E)
Plaintiff school boards assume that the Employment Security Commission considers these penalties to be part of the unemployment insurance contribution of employers, and that the commission considers the "contribution" to be a tax. Presumably, then, the commission adopts the same position as the Department of Revenue, that the penalties are part of taxes. The school boards agree that the same analysis should apply to these penalties as to those collected by the Department of Revenue. For the reasons given above, these payments should be considered penalties under Article IX, Section 7, and be paid to the public schools.
UNIVERSITY PARKING FINES
In G.S. 116-44.3 et seq. the General Assembly has given the trustees of each campus of the University of North Carolina the authority to regulate traffic and parking through adoption of ordinances. Included is the power to regulate traffic, set speed limits, require vehicle registration, install parking meters and tow violators. N.C. Gen. Stat. § 116-44.4. The trustees have the option of declaring violations to be infractions punishable by a fine of up to $50 or to impose a graduated set of civil penalties (with no apparent limit) "enforced by a civil action in the nature of debt." N.C. Gen. Stat. § 116-44.4(g) and (h).
Parking and traffic fines generate substantial revenues. In fiscal year 1999-2000, the Chapel Hill campus collected over $1.6 million; in the previous two fiscal years the sums were $892,000 and $744,000. The biggest money-maker was "no valid permit," which resulted in nearly $600,000 in fines in fiscal 1999-2000. At North Carolina State University, the collections in fiscal year 1999-2000 were almost $840,000, and the totals for the two previous years were $687,000 and $774,000. As at Chapel Hill, the most common offense was no parking permit, resulting in over $400,000 in collections in fiscal 1999-2000. (Defendants' Responses to Plaintiffs' Interrogatories # 23 and 24, attached as Exhibits F and G)
Because it is self-evident that these civil fines are penalties, and they are collected by a state agency, it seems clear enough that under Section IX, Section 7, the proceeds belong to the public schools. To start, there should not be any doubt that traffic and parking fines are among the penalties covered by the Constitution. This issue was decided in Cauble v. City of Asheville, 301 N.C. 340 (1980) ("Cauble II"). In that case the school board was attempting to collect parking fines paid to Asheville. A dollar penalty was assessed under a city ordinance, but state law at that time also made violation of any municipal ordinance a misdemeanor. Therefore, although most violators paid the fine "voluntarily" rather than subject themselves to the criminal prosecution, the court held that the fine was for a breach of the penal laws of the state and that the proceeds should go to the schools.
When Cauble II was decided, the key was that the parking violation was subject to prosecution by the State as a misdemeanor. Article IX, Section 7, applies to fines for "any breach of the penal laws of the State . . . ." If the state misdemeanor prosecution had not been hanging over the head of the violator, the offense would have been only a civil violation of a city ordinance. (Subsequently, in fact, the General Assembly, in response to Cauble, gave cities the option of having ordinance violations be misdemeanors or only be civil, resulting in most cities using only the civil route for parking violations and being able to retain the money. See N.C. Gen. Stat. § 160A- 175.)
In the case law that followed Cauble II, however, the distinction between criminal and civil violations, at least for state agencies, ceased to matter. That is precisely the holding in Craven County. An administrative fine or civil penalty - which indisputably describes the parking and traffic fines collected by the university - goes to the public schools just as a criminal fine does, if it is collected by a state agency. The University of North Carolina, and each of its constituent institutions, obviously is a state agency. Article IX, Section 8, of the North Carolina Constitution provides that "[t]he General Assembly shall maintain a public system of higher education, comprising the University of North Carolina and such other institutions of higher education as the General Assembly may deem wise." Chapter 116 of the General Statutes defines the University of North Carolina as a single institution comprised of the "constituent institutions" on the 16 campuses. See N.C. Gen. Stat. §§ 116-1 through -4. The university has the state's sovereign immunity and the responsibility of a state agency for compliance with federal laws. See Huang v. Board of Governors, 902 F.2d 1134 (4th Cir. 1990); Board of Governors v. United States Dep't of Labor, 917 F.2d 812 (4th Cir. 1990), cert. denied, 500 U.S. 916 (1991).
Why then is there any question that the parking and traffic fines collected by the university are covered by Article IX, Section 7? The answer apparently is in an opinion of the Attorney General to the university following the Craven County decision. The Attorney General opined in 1997 that Article IX, Section 7, was trumped by this single sentence in Article IX, Section 8: "The General Assembly may enact laws necessary and expedient for the maintenance and management of the University of North Carolina and the other public institutions of higher education." The reasoning was that this sentence authorized the university to generate revenue from parking and traffic fines to support i tself. The Attorney General got it wrong.
There is no reason to believe that in including the very general language of Section 8 in the Constitution the framers intended to override the more specific provision of Section 7 concerning support of the public schools. Section 8 itself says nothing about parking and traffic fines, or any other kind of penalty, to be assessed by the university to support itself. In declaring that the General Assembly could "enact laws" for maintenance of the university, the framers could only have meant laws that were otherwise consistent with the Constitution. Section 8 could not mean that the legislature was free to enact any kind of statute, no matter how it might conflict with the remainder of the Constitution, so long as it had as a general purpose the aid of the university.
The fault in the Attorney General's analysis is seen in its logical conclusion. If Section 8 allows the General Assembly to exempt the university from Section 7's requirement that penalties and fines go to the public schools, why would the legislature have to stop there? Under that reasoning, the legislature would be free to say that it is necessary for the "maintenance and management" of the university for the trustees to be able to define criminal offenses and set their punishment. And if Section 7 does not restrict the university, why would it be limited by Article XI, Section 1, which say the only punishments that may be imposed are death, imprisonment, fines, removal from office and disqualification from office? What would prevent the General Assembly from allowing the university - as part of its all-purpose authority of "maintenance and management" - to use other forms of punishment as it saw fit?
It is not logical to think that the framers of the Constitution intended to allow the legislature to exempt the university from those other provisions of the Constitution by the very general language of Article IX, Section 8; nor should one think that there was any intent to exempt the university from Article IX, Section 7.
OTHER PARKING FINES
The university is not the only state agency that collects parking fines. The Department of Health and Human Services, too, is authorized by G.S. 143-116.7 to collect civil penalties for violation of departmental motor vehicle regulations on the grounds of state-owned institutions. Complaint, ¶ 52; Amended Answer (of defendants Boyles, Broad, etc.), ¶ 52. As with the university parking fines, there should be no doubt that these are penalties and that they accrue to a state agency. Unlike the university, the Department of Health and Human Services does not have a separate constitutional provision for "maintenance and management" on which to rely for its resistance to paying these fines to the public schools.
Numerous state licensing agencies collect late fees for failure to renew a license on time. The complaint in this action includes a representative sample of those fees: the $30 collected by the State Bar under G.S. 84-34 for late payment of annual dues (Complaint, ¶ 43); the ten-percent-per-month assessment by the Board of Examiners of Plumbing, Heating and Fire Sprinkler Contractors under G.S. 87-22 (Complaint, ¶ 44); the $25 collected by the Board of Examiners of Electrical Contractors pursuant to G.S. 87-44 (Complaint, ¶ 45); and the $10 charged by the Board of Cosmetic Art Examiners under G.S. 88-21 (Complaint, ¶ 46).
In some instances the statute specifies the dollar amount of the fee, e.g., the $30 charged by the State Bar and the $10 by the Cosmetic Art Examiners, and other times the fee is based on a percentage of the cost of the license, e.g., the ten percent collected by the Plumbing, Heating and Fire Sprinkler Contractors. Based on the licensing boards' responses to interrogatories, it appears that in some instances the late fee originally was calculated based on some rough estimation of the costs of collections and in other situations the fee was simply set at a flat rate by the legislature and not changed often. All the boards are sufficiently creative find a way to calculate their costs to show that the late fees do not truly cover their expenses in identifying delinquent licensees and enforcing the renewal requirements. All the moneys collected are retained by the agencies for their general operating expenses. Sometimes the statutes speaks in broader terms as to how the money may be used, e.g., G.S. 87-27 allows the Board of Plumbing, Heating and Fire Sprinkler Contractors to use the funds for compensation and expenses of board members, employee salaries, and continuing education.
None of those distinctions matter because the character of the money for purposes of Article IX, Section 7, is not determined by how the fees are spent after they have been collected but rather by the reason for which they are collected. The Supreme Court has rejected the argument that a payment to an agency may be characterized as "restitution" to the agency and the State rather than a penalty. State ex rel. Thornburg v. House and Lot, 334 N.C. 290 (1993). Also see Shore v. Edmisten, 290 N.C. 628 (1976) (agency may recover as "restitution" its direct, additional expenses of enforcement, such as "buy money" used to set up a drug deal, but may not recover its general expense of law enforcement). If a payment is to be redirected to specific injured person, it could be considered remedial in nature and would not be a penalty, but payment to the state by itself establishes the nature of the collection as a penalty. Mussallam v. Mussallam, at 508-509; Lawrence, at 82.
Undoubtedly, there are costs associated with collecting licenses fees if the person is late in paying the fee or refuses to do so. Article IX, Section 7, addresses that circumstance by specifying that the public schools receive only the "clear proceeds" of penalties, forfeitures and fines. The agency is entitled to deduct its reasonable, direct costs of investigation and enforcement from the total amount collected and to then pay the remaining amount to the schools. Cauble v. City of Asheville, 314 N.C. 598 (1985) ("Cauble IV"). However, an automatic addition to an assessment to help pay an agency's operating expenses, such as a ten percent addition for "costs," does not necessarily bear any relationship to the actual costs of collection and should be considered part of the penalty itself. See People v. Barber, 165 N.W.2d 608 (Mich. App. 1968) (ten percent addition to fine to cover "costs" of prosecution, with proceeds going to law enforcement officers' training fund, is in conflict with provision of state constitution requiring all penal fines to go to libraries). The amounts other than the actual, direct costs of collection are penalties, and should go to the public schools.
THE DEDICATED CENTRAL FUND
Following the Craven County decision, the General Assembly decided that all administrative fines collected by state agencies should go to a central Civil Penalty and Forfeiture Fund administered by the Office of State Budget and Management. N.C. Gen. Stat. § 115C-457.1 et seq. Under G.S. 115C-457.3 the Office of State Budget and Management then is to transfer those funds to the State School Technology Fund to be "allocated to local school administrative units on the basis of average daily membership [enrollment]." The State School Technology Fund is under the control of the State Board of Education. N.C. Gen. Stat. § 115C-102.6D. Pursuant to G.S. 115C-102.6C, each local school board is required to develop a technology plan, submit it to the State Board for approval as a condition to receiving money from the State School Technology Fund, and is required to spend all such funds on technology according to that plan. This scheme for controlling the flow and use of civil penalties is contrary to Article IX, Section 7.
The words of Article IX, Section 7, are plain enough. The Constitution says that the proceeds of penalties, forfeitures and fines "shall belong to and remain in the several counties . . . ." This language is so straightforward and plain that it cannot reasonably be construed as meaning anything other than that administrative fines remain in the county where paid and are not subject to legislative control. The history of Article IX, Section 7, supports this view as well.
As Lawrence explains, the impetus for the current wording of Article IX, Section 7 - the wording that entered the Constitution in 1875 - was the experience with legislative intrusion into the "irreducible educational fund" that had been established in the Constitution of 1868. Lawrence, at 57-60. The 1868 Reconstruction constitution had been written to require that the "net proceeds that may accrue to the State . . . from fines, penalties and forfeitures" be used for public education. Id. Seven years later, though, it was evident that the legislature, faced with continuing monetary woes, could not resist diverting those funds to other purposes on a temporary basis. Id. Consequently, when the Constitution of 1875 was written the phrase "shall belong to and remain in the several counties . . . " was added. As described by Lawrence:
The 1875 Convention abolished the permanent endowment fund and earmarked most of its resources, except fines, penalties, and forfeitures, as current state revenues for public education. In addition, for the first time the convention constitutionally allocated certain moneys for public education directly to local government; these moneys did not have to pass through the State treasury. Among the moneys were 'the clear proceeds of all penalties and forfeitures, and of all fines collected in the several counties for any breach of the penal or military laws of the State.'
. . .
Thus, the 1875 Convention met in a context of declining confidence in the statewide educational fund and several years' experience of shifting school-related revenue sources from central state collection to retention in the county of collection. The two major 1875 changes continued the statutory pattern: the concept of a permanent educational fund was eliminated from the Constitution, and the county of collection rather than the State retained the proceeds of fines, penalties, and forfeitures.
Lawrence, at 58,60.
A recent case from Missouri supports the construction of our constitution to deny the legislature the authority to take administrative fines from the counties where collected. Missouri's constitutional provision on fines and forfeitures appears to be the model for Article IX, Section 7, of the North Carolina Constitution:
Missouri adopted a new Constitution in 1865, and the common school provision in that document is remarkably similar to the provision included in North Carolina's 1868 Constitution. There appears to be no common model for the two states' provisions, and thus it is likely that the North Carolina Convention used the Missouri provision as a model.
Lawrence, at 57.
In Ensor v. Director of Revenue, 998 S.W.2d 782 (Mo. 1999), the Missouri Supreme Court had to decide whether the state legislature could require forfeiture proceeds to be placed in a statewide school building fund, or whether they had to stay in the counties where the forfeitures occurred. The issue was decided on the difference in wording between the Missouri Constitution of 1875 and the 1945 version. The 1875 constitution had provided that "the clear proceeds of all penalties and forfeitures, and of all fines collected in the several counties for any breach of the penal or military laws of the State . . . shall belong to, and be securely invested, and sacredly preserved in the several counties, as a county public school fund . . . ." Ensor v. Director of Revenue, at 783. When the Missouri Constitution was rewritten in 1945, however, it said that "the clear proceeds of all penalties, forfeitures and fines collected for any breach of the penal laws of the state . . . shall be distributed annually to the schools of the several counties according to law." Id., at 783, n. 4.
Based on that change in the constitutional language, the Missouri court held that the legislature could place forfeiture proceeds in a statewide school building fund. The significance of the decision is that it was based on the elimination of wording in the Missouri Constitution similar to the language that remains in the North Carolina Constitution. If the 1945 amendments to the Missouri Constitution had not deleted the operative phrase - "shall belong to, and be securely invested, and sacredly preserved in the several counties" - the state legislature could not have taken the forfeiture proceeds and put them in a statewide fund. In North Carolina, by contrast, our Constitution has not been amended, it still says that the proceeds of penalties, forfeitures and fines "shall belong to and remain in the several counties." The plain sense meaning of those words - and the sense consistent with the Missouri decision - is that administrative fines remain in the county where collected.
A specific administrative fine at issue is an $80,000 penalty paid by the Department of Transportation to the Department of Environment and Natural Resources in 1988. Complaint, ¶¶ 66-70; Amended Answer (of defendants Boyles, Broad, etc.), ¶¶ 66-70. Defendants acknowledge that the civil was assessed pursuant to G.S. 130A-22 for violations of several statutes and rules concerning the handling of hazardous waste. (Defendants' Response to Plaintiffs' Interrogatory # 30, attached as Exhibit H) The statute itself says: "The clear proceeds of penalties assessed pursuant to this section shall be remitted to the Civil Penalty and Forfeiture Fund in accordance with G.S. 115C-457.2." N.C. Gen. Stat. 130A-22(i). The only issue concerning this $80,000, thus, is whether it goes to the centralized state fund for redistribution to all school systems in the state, or whether it remains in Buncombe County. See Amended Answer (of defendants Boyles, Broad, etc.), ¶ 70. The $80,000 should "belong to and remain in" Buncombe County under Article IX, Section 7.
Because the General Assembly cannot divert the proceeds of penalties, forfeitures and fines to a state fund, it necessarily follows that the legislature cannot require that those moneys be dedicated to a particular purpose. How the money which "shall belong to and remain in the several counties" is to be spent is set by Article IX, Section 7, as well. The Constitution requires that the money "be faithfully appropriated and used exclusively for maintaining free public schools." It is that constitutional directive, not the legislature's preference for pigeon-holing the money in a particular slot, that governs the local board of education's expenditure.
FINES PAID BY SCHOOLS
With the Craven County decision and the application of Article IX, Section 7, to administrative fines comes an issue that does not exist with criminal fines, what to do when the fine is against a school system itself. The Attorney General has advised state agencies that such moneys should not be returned to the school systems because it would not be good public policy. The public policy of North Carolina is set by the Constitution, however, not by the Attorney General, and there is no legal basis under the Constitution to not return administrative fines to schools.
If someone in the state were to say what the public policy should be, it ought to be the General Assembly, but the legislature has chosen not to address the subject. Although the General Assembly has purported to speak to a number of other policy issues since the Craven County decision was handed down in 1996 - which administrative fines are subject to the Craven County decision, whether they are collected locally or statewide, how the money is spent - it has said nothing to support the position that a school unit that incurs an administrative fine cannot have that money returned to it under Article IX, Section 7. In the absence of such a legislative declaration, there should not be any question that state agencies must pay administrative fines back to school systems.
Part of the complaint in this action (¶¶ 71-74) concerns an administrative fine paid by the Edgecombe County Board of Education. In 1997 the Division of Water Quality of the Department of Environment and Natural Resources assessed a civil penalty of $11,000 against the Edgecombe County schools for failure to comply with interim effluent limitations at the Phillips School wastewater treatment facility. Rather than spending a substantial sum of money to contest the penalty or dicker over the amount - and being aware of the constitutional provision - the superintendent chose to pay the $11,000 and demand its return under Article IX, Section 7. Complaint, ¶ 72. The department refused.
It is not easy to determine the amount of administrative fines paid by other local school boards. Virtually all instances will be in the Department of Environment and Natural Resources, and the department does not maintain department-wide numbers. When asked about penalties assessed against school systems since the start of 1995, i.e., a five-year period, the department reported about $194,000 paid to the Division of Water Quality, almost all below $2,000; only ten from the Division of Land Resources, with none more than $10,000; less than $10,000 total for violations related to rules governing public water systems; one $38,000 fine collected by the Hazardous Waste Section of the Division of Waste Management; and less than $15,000 to the Underground Storage Tank Section. (Defendants' Response to Plaintiffs' Interrogatory # 32, attached as Exhibit I)
What these modest sums and the accompanying documents demonstrate is that monetary fines against public schools are not critical to the department's enforcement efforts. In the great majority of cases, the department finds another way to work with the local school officials to resolve the problem. Even when initial assessments are made, generally those amounts are forgiven or substantially reduced as part of a settlement. In short, having those fines returned to the public schools would not hinder the enforcement of the department's regulations.
There is no statute nor any case law to support the Attorney General's view that the public schools should not receive the proceeds from fines they pay, and certainly there is nothing in the language of Article IX, Section 7, which could be read that way. The Attorney General's position appears to be based on his own notion of what is good public policy, expressing a view that schools should not "profit" from their own violations. Only brief reflection is needed, however, to realize that there is no profiting by the school system. If a school board must pay an administrative fine and then receives the money back pursuant to Article IX, Section 7, it has not profited, it has merely stayed even. Money that otherwise would have been taken away from the classroom has been restored to the school system to use for the purpose intended.
What is questionable as public policy is the concept of one governmental agency taking tax dollars from another. The Attorney General seems to have forgotten that the public schools' funds come from the taxpayers. When a school board has to pay an administrative fine to a state agency, the need for those dollars does not disappear, and the only way the gap can be made up is by taking more dollars from taxpayers or spending less on education. It is difficult to understand how that should be considered good public policy.
The problems that school systems encounter that lead to administrative fines usually follow from inadequate funding. It is not in the nature of a school system to intentionally violate water quality or waste management standards. Unlike a private corporation which might think it can save money and thus generate more profits, the public schools are not producing goods to be sold, they are simply educating children. The only reason a school system has to not meet water quality or other environmental standards is that it is unaware of the requirements or does not have the funds to do so. Imposing a monetary penalty to punish a school system whose lack of adequate funding led to the violation in the first place is not a very thoughtful public policy, either.
If "good public policy" were the issue before the court, there would be strong reason to reject the Attorney General's reasoning that public schools should not be given the administrative fines they pay. But it is not for the Attorney General or the court to decide such policy. The State Constitution, in Article IX, Section 7, expresses the overriding state policy that public schools should be supported by the proceeds of all fines, penalties and forfeitures. Nothing in the Constitution says otherwise, nor has the General Assembly tried to do so.
The court should declare that the penalties collected by the Department of Transportation for violation of vehicle weight limits; the fees collected by the department under G.S. 20-79(e) and -309(e); the "drug tax"; the tax penalties collected by the Department of Revenue; the penalties collected by the Employment Security Commission; the parking fines collected by each campus of the university system; the parking fines collected by the Department of Health and Human Services; and the late fees collected by various state agencies; all are included within Article IX, Section 7, of the North Carolina Constitution and should be paid to the public schools. There should be an accounting of the funds previously collected under those statutes, and an order directing their payment to the schools. The court also should declare that the General Assembly was without authority to establish the Civil Penalty and Forfeiture Fund and that civil penalties collected by state agencies should be paid to the boards of education of the counties in which the violations occurred. Finally, the court should declare that agencies are without authority to withhold administrative fines that were paid by school systems themselves.